Twitter is the best IPO opportunity since Tesla

Commentary: Smart strategy, executive incentives, good story

Tesla Motors Inc. is on a tear in 2013, gaining more than 400%. And with shares so frothy, with a forward price-to-earnings ratio of 90, many traders are looking for the next hot momentum stock. Well look no further than social-media icon Twitter for a replacement.

And after the Facebook Inc.
FB, -1.26%
IPO debacle, there are good reasons to be wary of an overhyped debut by a social-media stock. But here’s what I think that Twitter has going for it, and why I think that over the next few years could become the new momentum darling of Wall Street:

Executives have the right incentives

Twitter’s S-1 lists 472.6 million shares outstanding as of June 30. However, Chief Executive Richard Costolo has only 7.5 million shares or so listed under “shares beneficially owned” in the filing — about 1.6% of that total. Revenue chief Adam Bain has 1.7 million shares, for 0.4%. These guys certainly aren’t going broke, but they clearly have incentive to stay hungry and keep an eye on Twitter’s stock price if they want to get paid. And while the founders do get a bigger share of the pie, even the biggest stake, held by Evan Williams, is just 12%.

Compare that with Mark Zuckerberg’s stake of more than 28% in Facebook — more than the aggregate holding of the entire group of executives and officers at Twitter. For those worried that this will be another silly social-media vanity project, take comfort in those lower percentages. The lack of a rambling, self-important letter from the founders — like we saw with Facebook and also with Google almost a decade ago — is also a sign that Twitter’s leadership isn’t convinced this company is entitled to instant success.

Mobile, not social

Will.i.am meets The Muse’s CEO

(5:18)

The Muse aims to improve how job seekers use career sites, giving them a glimpse of what it's like to work for specific employers and assisting them along the way. "We want to build a movement, a community that people are really passionate about," CEO Kathryn Minshew tells the music-industry visionary.

The word “mobile” appears 130 times in the S-1 filing. “Social” appears just 24 times, and “sharing” only seven. That’s the right message. Mobile is the big mission for any technology business in 2013. Consider that, as of June 30, 75% of monthly active users accessed the social-media platform on a mobile device, and 65% of ad revenue came from phones and tablets. While other companies are racing to adapt to this mobile shift, Twitter arguably already has it figured out. As Twitter puts it, “We expect that the proportion of active users on, and advertising revenue generated from, mobile devices, will continue to grow in the near term.”

Big R&D opportunity

The nature of Twitter’s losses is also noteworthy, because they are driven almost wholly by a huge research budget. Consider that in 2010 the company generated $28.2 million in revenue but spent $29.3 million on research alone. The company is no longer spending more on research than it takes in, but it’s still a whopping line item on the budget. Twitter spent $111.8 million on research in the first six months of 2013 out of just $253.6 million in total revenue — over 44%!

There are two ways to look at this as an opportunity: either as investment in projects that will be big hits down the road, or as an opportunity to pull back a bit to right the balance sheet and win confidence on Wall Street.

Tesla took time

Twitter revealed in its S-1 filing that it isn’t yet profitable, with its “loss attributable to common stockholders” topping $164 million in 2011 and tallying nearly $80 million last year. However, remember Tesla
TSLA, -0.24%
also tapped public markets before it was profitable — and then used that IPO cash to fuel growth and a move to profitability. When the company did manage to break into the black with its first-quarter earnings in May, that’s what sent Tesla sky high.

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